Aircraft purchase tax saving strategies

[wdeninger]

With the purchase price of aircraft becoming more hefty year by year, I am exploring options to reduce my initial purchase tax liability and operating costs.  For example, in the state of Illinois, there is a 6.25% tax on aircraft purchases (with a few exceptions for charities, death beneficiaries, etc...).  For a $300k used aircraft, this amounts to approximately $20k tax upfront.  Is there a way to reduce this?  A few possibilities come to mind that are probably more bunk than substance, but I figure this forum would be a good start to explore what possible options may be out there.  I'm an engineer and not a tax accountant or financial advisor.  And it's quite a miracle that I can entertain purchasing an aircraft.

1. Form a non-profit corporation as the aircraft owner and insure that 50% or more of the flight time is for charity.  This path creates problems when selling the aircraft, although there may be additional tax benefits (both state and federal) when donating to the corporation to pay for operation costs.
2. Separate the cost of avionics from the value of the aircraft.  Although seeming a bit more shady, it could be though of as purchasing an older aircraft without avionics at a greatly reduced cost (avionics are expensive) and having used avionics installed outside the state after the aircraft sale. (Not to sure of how the state would tax avionics if they are purchased out of state...)
3. Win the Illinois lottery, be so flush with cash that I stop caring.  (This is the preferred solution, but the odds winning are less than being struck by lightening or finding a briefcase of money along side the road.  Further, IMHO buying lottery tickets may be viewed as a voluntary tax on stupidity).

Can anyone offer sage advice regarding aircraft purchases?

 

-W

Edited August 20, 2021 by wdeninger

[ArtVandelay]

There are people that do this professionally. I'd seek them out. The answers you'll get here will vary from register it in Delaware to God knows what.

For most states it doesn’t matter what state or entity it’s registered with. It’s where it spends its time, boats or planes, wherever you store them, that’s the state that will claim it for taxes. In NC I know for a fact that airports and marinas notify the state who’s resident at their facility.
It may take a while for the state to catch-up to you, when they do, they’ll add an unreasonable interest penalty on top of everything.

[KLRDMD]

Get out of Illinois. No sales or use tax here in Arizona.

[Ragsf15e]

Buy a $100k F instead of a $300k O.  Minimize taxes by 1/3.  Either of those will be really nice.

I live in a state with a high use tax.  When I moved here I tried but couldn’t find a hangar in neighboring Idaho which would have saved some.  Washington sent me a nice letter my first year so I went to pay the 1 time tax. They didn’t ask for or have any purchase info from my purchase 2 years before.  Just asked some basic questions (no questions about the engine time or avionics) about the airplane and gave me a tax value.  It was very fair, so I wrote a check.

While it does hurt, the onetime tax payment is likely less than operating expenses for the first two years.  Mine was actually less than 1 year of fuel.

[Hank]

I was gonna suggest "move somewhere else," but Ken beat me to it . . . .

[exM20K]

Pay your tax. Illinois Department of Revenue routinely tours ramps and monitors flight tracking.  If found to be avoiding use tax, it’s treble damages.

Labor is not taxed, so buying a “needs work” plane and dumping labor into it will save you some tax if not aggravation.

-Dan

[GeeBee]

Some states like GA have "garage sale exemption". However, it has to be a private party to private party purchase for that to work. If any brokers or dealers are involved at any point, it is a taxable sale. The other way around it is to put the airplane on a Part 135 certificate. This works in almost all states however, differing states have different levels of what is legal and what is a dodge. The Part 135 route can get to be more than the taxes, because the airplane must be fully compliant with the Maintenance manual times and requirements. Because each state is different, you need to consult a professional.

 

[ArtVandelay]

Pay your tax. Illinois Department of Revenue routinely tours ramps and monitors flight tracking.  If found to be avoiding use tax, it’s treble damages.
Labor is not taxed, so buying a “needs work” plane and dumping labor into it will save you some tax if not aggravation.
-Dan

Some states (like Florida) don’t tax aviation service (labor and equipment). So if you buy a project plane, you can be comforted by the fact you are not paying taxes to upgrade it.
I just checked controller, there’s only 4 Js for sale, when I was looking there were close to 20, so taxes may be the least of your problems.

[dlthig]

SC has $500 flat sales tax, but does have an annual property tax. I think it's about 1.5% or so. Again, buy cheap and fix. 

 

GeeBee, I thought GA had an annual tax as well, but the form I saw was more detailed than SC, so theoretically you would have to pay more if you fixed up your plane. I don't think SC does that. 

 

Another alternative is to put it on some sort of lease back with a flight school for a tax savings. You can put high requirements to keep the airplane safe.

[GeeBee]

GA does have an annual tax in addition to any sales taxes owed. The annual tax is "personal property tax". It also applied to boats, golf carts etc. The rate is the same as property tax on your home. It varies based upon the millage rate of the county involved, but you can figure about 1.15% of market value. Yes, the form is detailed with avionics additions etc. The good news is the assessment amount is appealable, and if you win, they can't change it for 3 years, unless you make significant changes to the property involved. 

Here is the sales tax law on "casual sale"

http://rules.sos.ga.gov/gac/560-12-1

 

[carusoam]

+1 for seeking out your local accountant…

It is hard to tell the best strategy and each state is different…

 

NJ has a sales tax on pre-flown planes….  Selling one plane to buy the next… I had one year or so to complete the transaction…

We have a really good accountant, with Mooney experience, around here that can possibly give some insight…

Best regards,

-a-

[jaylw314]

A quick bit of Google-fu suggests Illinois specifically targets aircraft sales for use/sales tax.  While "casual sales" are normally excluded from use/sales tax, aircraft specifically do not get that exception (which is different from many other states I've looked at, especially on the West Coast).  

[Brandt]

Well, the easiest solution would be to move to Indiana…..

But, absent that I suggest you have a conversation with www.aviationtaxconsultants.com 

 

[wdeninger]

My wife and I would love to move to TX, but having just moved from CA a few years ago with kids in grade school and middle school we are a bit sensitive about up-rooting them again.  We may be stuck in IL for another 10 years unless the education system here collapses.  With the COVID drive for at home learning, I put the odds of that at 50/50.

-W

[A64Pilot]

Ref Ga and possibly other States as well. If the Aircraft is in a Corporation you can buy the Corporation and no sales tax is due. The person I bough my J from, bought the Ga Corporation that owned the aircraft and paid no sales tax, he offered me the Corporation, but I didn’t want a Ga Corporation, maybe I should have taken it?

Often for many States if the boat or aircraft is owned for more than six months prior to it being brought into the State of Residence, no tax is owed.

I believe Fl is like that, so my Aircraft was kept in Ga for six months after purchase prior to arriving in Fl. It is owned by a Montana Corporation, but I think it will still trip a Fl use tax if kept in Fl during those six months.

‘I believe and may be mistaken but the 6 month rule is meant to allow people who move to fly or own something for use in another State from having to pay sales tax when it’s brought into Fl, for example when I registered my cars in Fl, I didn’t pay sales tax on them, nor did I have to prove I did in another State.

‘However I’d advise talking to a tax attorney as opposed to listening to what ai say, because I’ve been wrong before.

‘Tax code is as or more complex than FAR’s. Yiu may read am FAR that plainly says X, but there may other FAR’s that say different, that’s not uncommon dI assume the same for Tax code, so back to talk to a tax attorney, or CPA before your bet a whole lot of $$$

For Fl only, read the conclusion at the bottom, the whole article is good of course, but I’m hanging my hat on the six month out of State part after purchase. 

Other States may or may not be similar

https://www.floridasalestax.com/florida-tax-law-blog/2017/january/florida-airplane-florida-use-tax-considerations/

A gotcha is if I understand the law is that someone can vacation in Fl and stay more than 20 days and be subject to Fl use tax AKA sales tax if they have owned the aircraft for less than six months

Edited August 21, 2021 by A64Pilot

[GeeBee]

4 minutes ago, A64Pilot said:

Ref Ga and possibly other States as well. If the Aircraft is in a Corporation you can buy the Corporation and no sales tax is due. The person I bough my J from, bought the Ga Corporation that owned the aircraft and paid no sales tax, he offered me the Corporation, but I didn’t want a Ga Corporation, maybe I should have taken it?

Often for many States if the boat or aircraft is owned for more than six months prior to it being brought into the State of Residence, no tax is owed.

I believe Fl is like that, so my Aircraft was kept in Ga for six months after purchase prior to arriving in Fl. It is owned by a Montana Corporation, but I think it will still trip a Fl use tax if kept in Fl during those six months.

‘I believe and may be mistaken but the 6 month rule is meant to allow people who move to fly or own something for use in another State from having to pay sales tax when it’s brought into Fl, for example when I registered my cars in Fl, I didn’t pay sales tax on them, nor did I have to prove I did in another State.

‘However I’d advise talking to a tax attorney as opposed to listening to what ai say, because I’ve been wrong before.

‘Tax code is as or more complex than FAR’s. Yiu may read am FAR that plainly says X, but there may other FAR’s that say different, that’s not uncommon dI assume the same for Tax code, so back to talk to a tax attorney, or CPA before your bet a whole lot of $$$

No, because you are subject to transfer and intangible tax as well as income tax.  It is a fly out state, so buy it and fly it out. If you had remained in state, however, if it was a private party to private party sale, there would be no sales tax as again you are subject to casual sale provisions in GA

[A64Pilot]

7 minutes ago, GeeBee said:

No, because you are subject to transfer and intangible tax as well as income tax.  It is a fly out state, so buy it and fly it out. If you had remained in state, however, if it was a private party to private party sale, there would be no sales tax as again you are subject to casual sale provisions in GA

OK that makes sense, maybe. 

I say maybe because as I understand it a Corporation is a legal entity, the aircraft is property of the Corporwtion, the Corporation can be of a certain State and the owner of the Corporation doesn’t have to be a resident of that.

‘Many people have Corporations from other States to own there Motorhomes, Yachts, and aircraft for tax purposes. 

[Yetti]

I don't think you can fly in Illinois.   I used to have to fly there for work.   I avoid routing through Chicago like the plague .  

[GeeBee]

2 hours ago, A64Pilot said:

OK that makes sense, maybe. 

I say maybe because as I understand it a Corporation is a legal entity, the aircraft is property of the Corporwtion, the Corporation can be of a certain State and the owner of the Corporation doesn’t have to be a resident of that.

‘Many people have Corporations from other States to own there Motorhomes, Yachts, and aircraft for tax purposes. 

If the vehicle is in the state of GA for more than 30 days, does not matter what state the owner is located, it has to be registered in the state of GA. Ask Bob Shelton,  the former head of the Delta ALPA union how that Florida thing worked out for him. Registered his cars and claimed FL residency to dodge GA taxes.  (Hint: Two words across, Criminal indictment)

 

[Ragsf15e]

3 hours ago, 1980Mooney said:

You are not escaping any tax by moving to TX.  Per the Texas State Comptroller:

When buying an aircraft in Texas, you will pay between 6.25 percent and 8.25 percent sales and use tax on the aircraft’s sales price, less the value of any trade-in. In most cases, the total tax paid is based on the rate in effect at the seller’s place of business.

• The state sales and use tax rate is 6.25 percent.
• Local sales and use tax rates vary throughout the state, up to 2 percent.
• The maximum combined tax rate is 8.25 percent.

If you buy it "without avionics" as you ponder in your first post (not sure how you do that but possible if you buy a hangar queen that has been stripped of ancient electronics), you will still have to pay the same 6.25-8.25 percentage sales taxes on all the added avionics and parts in the future.  Labor is not taxed.

I think winning the lottery is still your best strategy......

If it’s a private seller and buyer (not a business), there’s a casual sale exemption in Texas.  I did it.  It wasn’t difficult.  However when I moved to Washington, there was no exemption and I had to pay the Washington use tax.

Dont worry though, Texas is just like every other state, they get their tax money from somewhere!

Edited August 21, 2021 by Ragsf15e

[amillet]

 

The state of Washington has adopted a “tax avoidance” statute ( any transaction or arrangement through which a taxpayer “attempts to avoid Washington sales or use tax by vesting legal title or ownership of the property in another entity over which the taxpayer effectively retains control.”

http://app.leg.wa.gov/RCW/default.aspx?cite=82.32.655
 

Prior to this statute I and my partners held title to an aircraft in a non-profit corporation and transferred the membership interest to avoid sales tax. I don’t think that works any longer in WA.

[A64Pilot]

1 hour ago, GeeBee said:

If the vehicle is in the state of GA for more than 30 days, does not matter what state the owner is located, it has to be registered in the state of GA. Ask Bob Shelton,  the former head of the Delta ALPA union how that Florida thing worked out for him. Registered his cars and claimed FL residency to dodge GA taxes.  (Hint: Two words across, Criminal indictment)

 

I think we are talking two different things, aircraft aren’t State  Registered in Ga.. I don’t know the ins and outs of the Motorhome thing, just it’s done pretty frequently.

However if your interested, it’s laid out here

https://www.49dollarmontanaregisteredagent.com/vehicle-llc

It doesn’t seem to be much different than “flagging” your Yacht in the Cayman’s and keeping it in Ft Lauderdale.

‘I know a boat in Fl for 90 days has to be Registered in Fl, but that doesn’t trip tax.

But I’m sure each State is likely different, from what I can tell if you own an aircraft for six months or longer and bring it into Fl, there is no tax due.  Aircraft aren’t registered in Fl, but I think some States they are.

‘I don’t mean to get into an argument with you, but I’ve heard from several sources that if a Corporation owns an aircraft and you buy the Corporation, you don’t owe sales tax for the Aircraft. presumably because the ownership of the aircraft didn’t change.

However if we are talking any real money it’s best to get legal advice, and not go on he said, she said, I certainly am no tax expert, I’ve always gotten a CPA to prepare mine and pretty much do as they say.

Edited August 21, 2021 by A64Pilot

[Ragsf15e]

2 hours ago, 1980Mooney said:

Looks like they effectively closed that loophole in Texas. The exception is now limited to $3,000 of sales so you can save about $240…..!!!

”(4) The sale of tangible personal property by an individual is an occasional sale if:

 (D) the total receipts from such sales do not exceed $3,000 in a calendar year. If the total receipts from the individual's sales of such tangible personal property exceed $3,000 in a calendar year, the individual must obtain a sales tax permit and collect tax on all sales of taxable items in this state, beginning with the first sale which causes the total receipts to exceed $3,000.”

I don’t think so.  This from the Texas comptroller website and your average personal airplane sale meets the first circumstance. Your example was the second circumstance, but it definitely says either…

Occasional Sales by Individuals

If you occasionally sell personal items, you may qualify for the "occasional sales" exemption. If you qualify, you do not need a sales tax permit, and you do not collect tax on those sales.

You can qualify for an occasional sales exemption if you meet either of these requirements:

• You only sell one or two taxable items during any 12-month period (not just January-December) – the price of the items does not matter. 
  • Example – you sell a piano for $400 and a bicycle for $200 at a garage sale in a 12-month period. You later sell your used lawn mower for $100 before the end of that 12-month period. Selling the lawn mower is a third sale, so you must get a sales tax permit and collect and pay sales tax on the lawn mower.
• You sell in a calendar year (January-December) items originally bought for you or your family members for personal use, and you don’t make more than $3,000 on those sales during the calendar year. You can sell as many items as you want to as long as your total sales are $3,000 or less during a calendar year.

[Mooney Dog]

1 hour ago, Ragsf15e said:

I don’t think so.  This from the Texas comptroller website and your average personal airplane sale meets the first circumstance. Your example was the second circumstance, but it definitely says either…

Occasional Sales by Individuals

If you occasionally sell personal items, you may qualify for the "occasional sales" exemption. If you qualify, you do not need a sales tax permit, and you do not collect tax on those sales.

You can qualify for an occasional sales exemption if you meet either of these requirements:

• You only sell one or two taxable items during any 12-month period (not just January-December) – the price of the items does not matter. 
  • Example – you sell a piano for $400 and a bicycle for $200 at a garage sale in a 12-month period. You later sell your used lawn mower for $100 before the end of that 12-month period. Selling the lawn mower is a third sale, so you must get a sales tax permit and collect and pay sales tax on the lawn mower.
• You sell in a calendar year (January-December) items originally bought for you or your family members for personal use, and you don’t make more than $3,000 on those sales during the calendar year. You can sell as many items as you want to as long as your total sales are $3,000 or less during a calendar year.

Welp this would have been nice to know.... 

[Ragsf15e]

32 minutes ago, Mooney Dog said:

Welp this would have been nice to know.... 

it only works with personal sales, not with from brokers who have purchased the airplane to sell it.